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to Let The idea behind the buy-to-let approach is that the purchaser buys a residential property with the intention of renting it out, rather than living in it. There are specific mortgages available for the purchase of buy-to-let properties as standard mortgages rarely allow this. In periods where interest rates and/or property prices are rising, the initial outlay for would-be landlords, increases, consequently reducing potential rental yields. So a profitable investment in the buy-to-let market needs some careful planning, following the guidelines set out below. Pick the right property Choose your property very carefully. Above all, don't buy somewhere because you like it, buy it because everyone else will like it - you are not the one who is going to have to live there. The Association of Residential Letting Agents (ARLA) recommends talking to letting agents in the area where you intend to buy. They should have a good knowledge of which properties are in high demand and where the market is getting overheated. Ask yourself who your tenant will be - this will make a lot of difference to the area you choose and the amenities which will need to be nearby. As a general rule, smaller properties in urban areas are nearly always a good buy, in particular one or two-bedroom flats and maisonettes. Larger properties are usually more popular in university towns, where it is easier to fill all of the rooms, but although you will be getting rent from more people, student rents are often quite low. Also consider the potential condition of the property after years of student occupancy should you wish to sell it. Get the right furnishings Furnishings need to be of decent quality if you want a decent yield. Keep to neutral furnishings like white walls and bathroom suites. Wood-stripped floors are desirable among young professionals - especially American and European renters.Fashions also change as to what add-ons tenants expect. For example, power showers and microwave ovens are now almost essential items whilst, recently, cable and satellite TV access and a second telephone line for a PC have become standard requests from tenants. Decide your rent Research the going rate for similar properties in the area very carefully. Many people set their rents too high and are afraid to lower them in times of trouble - but remember it is better to have a lower rent than none at all. Vacancy periods are potentially the most dangerous aspect of buy-to-let. You should factor these in realistically and again, don't be scared to drop rents if necessary. Bear in mind also when making your purchase that rental rates can be subject to seasonal fluctuations. Rates traditionally peak in late summer - coinciding, as it does, with graduates taking up their first jobs, students looking for term-time accommodation, and families settling down before sending their kids off to school. You should also ask yourself what you want from your property. Are you looking for capital growth (i.e. a growing market value) or income? Your decision will affect both your property choice and the area you look at. Often those properties with the highest rental yields will be the ones with the lowest potential capital gains. Consider the worst-case scenario You must ask yourself, what happens if, having bought the property, refurbished it and put it into the buy-to-let market, you can't find a tenant for six months? This is one of the biggest risks of buying-to-let. All the time you are forking out money to pay the mortgage, agency fees and maintenance costs, you are getting no return on your investment. So before you sink a penny into a buy-to-let property, do your sums to see how you would cope if this happens to you. When you purchase your buy-to-let property, you will have the same set-up costs that you would with buying any other property: stamp duty, legal fees, survey costs, any mortgage-related fees and organising a repayment vehicle. Thereafter, agency fees, building insurance, ground rent, utility contracts and maintenance costs will also take their toll. Make a comprehensive list of all potential costs - and also build in some leeway for a rise in mortgage rates. Unless you can realistically ask for a rent that covers all of these, your only return is going to be the potential capital gain on the property. Also ask yourself seriously if you could meet the monthly costs out of your own pocket during void periods. If you do find yourself without tenants for long periods, consider why. Is the rent too high? Is the standard of decoration and furnishing too low? Is the agent not being proactive enough? Is your property in the wrong location or are there too many of this type of property on the market in your area? Take action as quickly as possible. Get the right tenancy agreement Problems can arise with tenants who refuse to pay their rent or who refuse to move out. However, a properly-written contract can cover you for most eventualities. A solicitor or managing agent can prepare a suitable tenancy agreement - typically one with a break clause after the first six months, allowing either party thereafter to give one or two months' notice. If you are an experienced property investor, you might like to consider shorter tenancies within the framework of the Assured Shorthold Tenancy, with a minimum of 90 days, rather than the traditional six months. This type of short-term renting can command higher rents and is popular with corporate occupiers in cities such as London, but does hold the risk of greater void periods. Understand your tax position You can set some of your costs against tax. All expenses of a 'revenue nature' qualify for tax relief - as well as mortgage interest, this also includes the cost of insurance, cleaning and gardening services, letting agent commission and any other management expenses which are not classified as improvements to the property. Although you are not able to claim tax relief against the initial costs of furnishing the property, you can claim for the cost of replacing items in the future. A wear and tear allowance of 10 per cent of the annual rent, less water rates, is available but, obviously, only where you have furnished the property yourself. Keep a careful note of rents received and expenses as they arise. You must retain records of these, together with back-up records such as receipts and invoices, for six years after the tax year in question. Income from your property must be included in your self assessment tax return in the Land & Property supplementary pages - if you are a new landlord you will have to request these from your tax office. Tax on the income will be treated as your highest slice of income and will be charged at the normal rates. You can elect to pay the tax in half-yearly instalments. However, if you are employed and the amount taxable in respect of your property income is small, your PAYE code can be adjusted to collect the tax gradually throughout the year. Unlike your main residence, any profits you make when you sell a second property are liable to capital gains tax (CGT) at your highest rate of income tax. However, there are ways to mitigate this liability. The property will also be included in your estate when you die, which can lay it open to inheritance tax. Get a good mortgage deal Taking out a buy-to-let mortgage obviously involves meeting slightly different criteria to a normal mortgage. The expected rental income on the property must exceed your mortgage repayment by a certain set percentage, the level of which varies from lender to lender. Some lenders only consider rental income, while others will also take into account your normal income. It is also worth noting that under some buy-to-let schemes, you have the scope to buy more than one investment property. A number of lenders are offering deals such as fixed rates available over periods of two to ten years. You are unlikely to get the super-low fixed rates you can pick up on conventional mortgages but a fixed rate mortgage will give you the opportunity to work out your overheads in advance. Loans are widely available, from £15,000 to £1 million per investor, for periods of five to 45 years. One big difference from the normal mortgage market, though, is the percentage lenders will advance.The maximum tends to be 80 per cent of the property value, so buy-to-let mortgages are only viable if you can stump up 20 per cent of the property purchase price as a deposit. Some buy-to-let mortgages have hefty penalties for early repayments of capital. However, auseful development for buy-to-let investors is the flexible mortgage offered by some lenders, which lets you overpay on the loan, underpay and take payment holidays when money is tight - all without penalty. Keep an eye on the market Hopefully, all will go smoothly if you bear in mind the points above, but don't become complacent. Rental tenants are notoriously fickle and you need to ensure that your property, both in terms of condition and facilities, meets market requirements if you are to enjoy a constant flow of income. If you are using an agent, get feedback at least every six months about what the market is doing so you can see if you need to invest more in the property. Do you really need an agent? An agent will deal with the tenancy agreement, tenants' references and day-to-day administrative problems. The agent should also collect the rent and deposit it in your account, and also make regular inspections of the property. Their commission and management fees can be a large portion of your expenditure. Typical fees are around 15 per cent plus VAT of the gross rental income - although they tend to vary from region to region. If you are feeling brave, therefore, you could save quite a bit of money by doing the work yourself. However, unless you have a lot of time on your hands, the chances are you will benefit from an agent's expertise. You could compromise by using the agent for some duties such as advertising the property and drawing up contracts while you take on the maintenance responsibilities - but discuss a sensible balance with the agent first. Points of Contact Association
of Residential Letting Agents - 01923 896555 Department
of the Environment - 0870 122 6236 Department
of Trade & Industry - 0870 150 2500 Royal
Institution of Chartered Surveyors - 0171-222 7000
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